[Column] Banks Reacting Only to 'Gwanji'

President and Financial Supervisory Service Chief Respond to Criticism of 'Interest Business'

[Asia Economy Reporter Yu Je-hoon] 'Interest business' is a criticism that is almost a fate for commercial banks. This is because the essence of their business is to make a profit from the interest rate spread between deposits and loans. This is also why there is a self-deprecating remark that "telling banks not to engage in interest business is no different from telling them not to operate."

The four major financial groups have continued their strong performance through the COVID-19 pandemic. They posted a net profit of about 14.5 trillion won last year alone, and the net profit for the first half of this year is expected to exceed 9 trillion won. This comes amid increasing public criticism surrounding interest business.

However, banks have shown little movement so far. The deposit-loan interest rate spread, which was the cause of record-breaking profits, has continued to widen. According to the Bank of Korea, as of May, the interest rate spread of commercial banks was 2.37 percentage points, the highest in over seven years. On the other hand, as good performance continued, dividend payouts also followed. Some banks have even announced plans to regularize quarterly dividends starting this year.

Ironically, what moved the previously immovable commercial banks was the verbal intervention of the new administration, which called for a 'restoration of liberalism.' On the 20th of last month, President Yoon Suk-yeol personally requested to "find ways to reduce the burden on vulnerable groups," and Lee Bok-hyun, Governor of the Financial Supervisory Service, issued a warning about 'excessive profit-seeking by banks' during a meeting with commercial bank heads.

The banks responded swiftly. Just four days later, starting from the 24th of last month, Woori Bank decided to uniformly apply a preferential interest rate of 1.3 percentage points to fixed-rate loans based on 5-year bank bonds even for credit grades 8 to 10, lowering the upper limit of interest rates from over 7% to the 6% range. Shinhan Bank went further by implementing a bold measure to cap the interest rate for existing mortgage loan users at 5% per annum for one year.

Of course, for banks, interest rates are essentially the 'price of their products.' The government's apparent intervention in the 'product prices' of private companies is not a particularly favorable sight. Especially, it raises doubts about the current administration’s commitment to restoring a liberal market economy, which it has championed while criticizing the past five years. However, the complex crisis our society faces?high inflation, high exchange rates, high interest rates, and low growth?is a situation that neither the private sector nor the government can afford to ignore. Moreover, the economic strength of households has been severely weakened due to the COVID-19 pandemic that struck the world over the past three years.

The public clearly remembers that about 168 trillion won of astronomical public funds were injected into the financial sector during the foreign exchange crisis over 20 years ago. This is likely why high bank profits are often met with unfavorable scrutiny. Rather than banks being 'prodded into bowing,' we want to see them take proactive steps first.